China stocks may be poised for post-Olympic glory

ChrisOliver

HONG KONG (MarketWatch) -- Few forecasters anticipated the crash in Chinese stocks in the run-up to the Beijing Games. Fewer still are forecasting a post-Olympic rally.

But some analysts say Chinese shares could perk up in the wake of the closing ceremonies -- helped by a global easing of commodity prices, abating inflationary pressures and a market purged of excessive exuberance.

"As commodity prices fall, especially oil, the inflation rate will slow down and austerity measures will be relaxed," said Henry Chan, head of research at Hong Kong brokerage Quamnet. "Economic growth should pick up."

The first signs China may be about to relax credit restrictions were evident earlier this week. State media reported Wednesday that the People's Bank of China increased loan quotas for local and regional banks by 10%. The revised quota, higher than an expected 5% rise granted to state-owned banks last week, was widely seen as helping channel more funds into the small and medium-sized enterprises which make up the majority of the client base for commercial lenders.

The higher rate should allow banks to extend up to 200 billion yuan ($29.1 billion) in new loans, up from 182 billion yuan earlier, according to media reports.

"I would recommend investors accumulate on any major dips," said Alex Tang, head strategist at Hong Kong brokerage Core Pacific-Yamaichi, referring to China shares traded in Hong Kong and Shanghai. "The negative news is very much a factor in the current price level."

Tang said the Shanghai Composite is now trading at a forward price-to-earnings ratio of 18, down from about 35 a year earlier. He judges that level "reasonable", given the higher earnings potential for Chinese companies. Tokyo's broad index is currently trading around 17 times this year's earnings.

Those expecting China to tighten its belt after a $40 billion outlay on Olympic venues and other infrastructure to support the games should consider the new infrastructure projects planned or already under development. China will spend up to 3.8 trillion yuan on transportation infrastructure and another 1 trillion yuan to bolster its power grid in a series of public works projects outlined to 2010.

"Buoyant domestic demand and an infrastructure boom suggest that the slowdown will be less severe than Olympic pessimists predict," wrote J.P. Morgan Securities' Hong Kong-based chairwoman Jing Ulrich, in a research note Thursday.

China's battered Shanghai Composite index, down 44% in the past year, and 57% in the last 10 month, is more likely to rally in the wake of the games, if the experience of previous host nations is any indication. The benchmark tumbled 4.5% Friday, ending at a fresh 52-week low.

In nine of the 11 Olympiads going back to Tokyo in 1964, the stock markets of the host nation rallied 21% on average in the 12 months following the games. According to HSBC Global Research, this bettered a 9% rise in global equities generally. Data from the Mexico Olympics in 1968 and the Moscow games in 1980 were eliminated from the survey because they had no officially functioning stock markets at the time.

By contrast, in the year preceding the event, markets rose 12% on average, outperforming global equities of the period by 5%.

In the immediate run-up to the Olympic event, however, returns are typically less positive. Stock markets of the host nation fell an average of 6% in the three months leading up to the games, underperforming global averages by 1%.

China's Shanghai Composite swooned 28.7% in the three months prior to today's kickoff in Beijing, making it one of the worst performing host nations from a stock market perspective.

In recent times, there have been fewer signs of a hangover in the aftermath of the games. Every nation that has hosted the Summer Olympics since 1988 has seen its domestic stock market outperform global peers in the 12-months following the big event by a solid margin. Greek equities outpaced global returns by 20% in the year that began mid-August 2004, the month when Athens hosted the games. Australia's benchmark shot up 31% above other global equities after the summer games were held in Sydney in 2000. Gains on Wall Street soared 12% above global equities in the year-long period from mid-July, the month that saw Atlanta host the 1996 games.

However, an exception to the bullish scenario did occur in one of the only two times the Summer Olympics have been held in Asia. In the 12-month period following Tokyo's 1964 games, the Nikkei Stock Average underperformed global averages by 7%. South Korea's Kospi turned in a better performance, rising 21% above global returns in the 12 months following Seoul's 1988 games.

In the 15 Olympiads stretching back to London in 1948, economic growth in the host nation outpaced global growth in the three years running up to the games, but fell 0.1 percentage point below in the year following. It's not clear China's growth will slump below the world average this year, but it is likely to slow. Economists expect the pace of growth in the mainland to cool further in the final half, decelerating from a 10.1% and a 10.6% expansion in the second and first quarters respectively.

The slowdown is in keeping with the experience of other Olympic hosts. Japan and South Korea, both nations that wanted to use the Olympics to showcase their development, saw growth rates halved in the year following their events. Despite this, stock markets in both nations eventually went on to set new highs.

Next week's inflation, industrial output and retail sales data for July should offer up clues to the direction of China's monetary policy. Credit Suisse forecasts CPI will fall to 6.5%, marking the third straight monthly decline - and down from June's 7.1%. Producer price inflation, the broker forecasts, will hit 9.2%, up from 8.8% in June, before easing back to around 8% by the end of the year, as commodity prices continue to moderate.

With inflation about to peak, Beijing will likely unwind some austerity measures, wrote Jun Ma, Credit Suisse's chief economist for Greater China, in a research note Thursday.

"The package of July economic data should be viewed as broadly supportive of market sentiment, as it would indicate further scope of policy relaxation as well as broadly stable or only modestly slowing economic activities," Ma said.

Still, Chinese stocks could face headwinds from the huge number of shares that will come off lock-up this month. About 250 billion yuan of shares will be eligible for trade in August. Of these, however, about 90% are held by state enterprises, which are unlikely to sell, according to HSBC.

Others say it's too early to call the inflation battle over. Central banks, faced with worryingly high inflation, are unlikely to ease up on credit reins just yet.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.